Tuesday, December 15, 2009

The Dubai Debt and Financial Crisis: A Case of the Inevitable

Dr. Mohd Nazari Ismail

Following recent headlines on Dubai’s billion-dollar debt problem, there has been a spate of analyses. Some were very detailed and contained a list of lessons to be learnt by other countries. One recent and notable analysis emphasized the need for predictable, sustainable, clear and certain policies and argued that it is because of the lack of all those factors that Dubai is currently facing problems. In other words, the writer is saying that not only is it possible for countries to avoid financial crises, it is also very simple since what is needed is to make sure that the countries’ policies are not unpredictable, not unsustainable, not unclear and not uncertain.
The question that springs to mind will then be: How come all those brilliant Ivy League-educated policy-makers in countries that have experienced debt-related financial crises in the past such as Iceland, Britain, Korea, Indonesia, Thailand, Argentina, Brazil and of course the US itself (which boasts of having the top universities in the world and the most number of Nobel laureates in the field of economics and finance) have not figured these simple rules in the past?
And come to think of it, if avoidance of financial crisis is so simple, why do people bother so much in carrying out detailed research in order to prevent their recurrence? Maybe we should also not be too agonized with the fact that Malaysia has not produced any Nobel Prize winner in the field of economics or finance. The experience of the US has shown that having the best economics brains in the world is not going to help a country avoid the occurrence of financial crises.
Coming back to Dubai, it is worth pondering why financial crises continue to occur even though there had been so many crises in recent years which ought to have yielded important lessons. These include the 1987 Black Monday Crash, the 1994 Mexican Financial Crisis, the 1997 Asian Financial Crisis, the 1999 Brazilian Financial Crisis, the 2001 Argentina Financial Crisis and the 2007 US Sub-prime Financial Crisis. Surely policy-makers have had enough data, facts and information at their disposal to help them prevent the occurrence of financial crisis, especially if it as simple as coming up with policies which are predictable, sustainable, clear and certain.
To be sure, financial crises are not a new phenomenon. They have been taking place for hundreds of years. One of the most famous was the Tulip Crisis in Holland which took place in the 1630s. What happened was that many highly indebted people could not repay their debts, enough to cause a crisis in the Dutch economy. While the Tulip Crisis was caused by over-speculation in tulip bulbs, in the case of Dubai, the cause is over-speculation in the property sector. But the essence of the two stories is the same: people got excited with the booming price in a particular sector. They then borrowed heavily to engage in speculative transactions causing further increase in the size of the speculative `bubbles’. Eventually the bubbles burst and many people became financially unstuck causing a downward spiral of price and more trouble to the economy which eventually led to financial and economic crises.
Strangely enough however, it seems that this simple lesson on the importance of having predictable, sustainable, clear and certain policies was not easily learnt because well after that episode, financial crises continued to erupt in Europe and the US. The most famous ones include the 1720 South Sea financial crisis in London, the US panic of 1873, and the Great Depression of the 1930s. They all have one thing in common. Many people borrowed money in order to engage in speculative transactions in a variety of assets such as property and stocks. These activities led to asset bubbles which eventually burst, resulting in widespread financial insolvencies and, thereby, economic crises.
One notable fact is that these financial crises during the 17th, 18th and 19th centuries took place mostly in Europe or America and not in places such as the Middle East or South East Asia. So a question worth asking is whether in these regions, predictable, sustainable, clear and certain policies were in place to regulate their financial sectors? Well, obviously that is not true for the simple fact that these regions, in those eras had no financial sector to regulate. In other words, the main reason they did not experience any financial crisis was simply that they did not have any significant financial sector to start with. Of course eventually they began to develop their own financial sectors and soon they too experienced financial crises. The most serious one for South East Asian countries was the 1997 financial meltdown and just as in the case of other financial crises, it was also a story of debts, speculation and the bursting of asset bubbles.
Truth be told, once a country developed a lending-for-profit sector of its own, there is no avoidance of a financial crisis even if predictable, sustainable, clear and certain policies are in place. Britain and America are the best examples of this. As is well known to many, these are two countries which are models to others in terms of financial regulations and supervision. Nevertheless the fact remains that the same two also happened to be among the ones which are experiencing the worst financial crises in the world. One very important, maybe the most important, lesson we should learn is that the occurrence of financial and debt crisis is an inevitable outcome of the existence of a lending-for-profit sector. And the more `developed, sophisticated and advanced’ the sector is, the bigger and more serious will the crisis inevitably be.

Wednesday, November 4, 2009

End-Of-Life Vehicle Policy: Putting People Last?

When the government said that it wants to put the people or rakyat first, many wondered whether the term `rakyat’ refers to the general public including the low income groups or whether it refers only to those in the upper income bracket. The recently announced End of Life Vehicle policy (ELV), if ever it gets implemented, will provide the answer to the question.
When the government for the first time spelled out the ELV policy, it was together with the announcement on the National Automotive Policy (NAP) the main objective of which, as we all know, is to sustain the growth of the nation’s auto industry. This is sufficiently indicative of the main motive for the ELV policy. The excited and happy response of the country’s main auto manufacturers more or less confirms this. They are all hoping that this policy will help increase their sales and profitability as owners of aging cars are persuaded to switch to brand new cars. On the other hand, owners of 10 to 15 year old cars many of whom are from the lower income groups are generally alarmed at the grim prospect of increased financial burden.
Some supporters of the ELV policy argue that it is high time that Malaysia follows other developed countries to implement the policy. This is a classic example of jumping-onto-the band-wagon fallacy because it ignores many significant differences between Malaysia and other developed countries such as Britain and Japan. One of the most important differences is in terms of income levels. Another is the price of cars. The 2008 GDP per capita (from World bank statistics) for Malaysia is USD7,221 while for the UK it is USD43,089. The price of an `average car’ in Malaysia, say a Proton Waja, is about USD19,000. If we compute Malaysian car price to GDP per capita ratio, it is about 2.63. In the UK, the price of a Proton Waja is USD19,200. The UK’s car price to GDP ratio is therefore 0.44. Therefore, relative to income levels, the price of cars in UK is about one-sixth the price of cars in Malaysia. In other words, the same Waja should only cost around RM11,000 instead of RM66,000 if we take our income levels into account. The fact is the price of cars in Malaysia is horrendously high due to protectionist policies. If the argument to justify ELV is that we should follow developed countries like the UK, new car prices in Malaysia should also first emulate car prices in the UK. Then only would the argument make any sense. Otherwise, the policy will impose a terrible burden on the average family. There will be many implications, from reduced savings for their children’s education to less money to pay for medical bills.
The government may argue that the reason is to improve the environment because new cars are more fuel efficient. This is actually a nonsensical argument. A recent study found that the positive impact on the environment by the US government’s `Cash for Clunkers’ program, which is a variant of the ELV policy, is very insignificant. Moreover Time magazine in its commentary on the US Government’s `Cash for Clunkers’ program highlighted the “undeniable fact that destroying an existing car — even a clunker — and manufacturing a new one requires energy and carbon emissions that would be saved if you just held onto your old car”. The reason is very simple. Assume that as a result of the ELV policy, there will be an additional sale of 200,000 cars on Malaysia road a year. If the average price of the cars is RM65k, then we are talking about a total increase of RM 13 billion which was completely unnecessary since without the ELV program there will be no such sales. The owners of the 200,000 new cars are now forced to work to pay for the purchases. Assuming that they are in the manufacturing sector, now the factories will be working longer etc. If they had not been forced to buy a new car, they would have had no new debt to worry about. Now instead of relaxing at home with their families, the car buyers are busy working in their factories and burning fossil fuel in the process. Actually, if the government is really serious about the environment, the focus should on reducing the number of big fuel-guzzling cars or SUVs or improving public transportation system so as to reduce the number of cars on the road rather than encouraging new car sales and new debts.
Another argument made for the ELV is to reduce accident rate. This is truly farcical because so far the government has not produced any statistics indicating that road accidents in Malaysia are caused by 15-year old cars. Actually we all know that most accidents actually involved motorcyclists. Furthermore, anecdotal evidence (such as the type of cars involved in accidents parked at a police station in my neighbourhood) seems to indicate that they are caused by young reckless drivers driving powerful new cars. Most owners of 15-year old cars are conservative or elderly drivers who simply do not speed recklessly on the road.
It is therefore obvious what the ELV policy is all about. It has nothing to do with the environment or the need to reduce accidents on the road. It is all about wanting to force people to buy new cars and abandon their old cars regardless of the roadworthiness of their existing cars or their income levels or financial situations. Presently many Malaysians have problems managing their debts. Hence the never ending reports of Ah Longs and their exploits. If the policy becomes practice, apart from the car manufacturers, the Ah Longs too will be very delighted.
As stated earlier, the ELV policy is going to be a real indicator as to whether the government puts the welfare of the people first or whether it is more concerned with the health of the country’s car industry. Fortunately I think our PM is not a politically foolish person. He knows that if the government is perceived to be unjust to the people vis-à-vis this ELV issue, then all his efforts to improve the perception of the people towards the government will suffer a serious setback. Nothing drives the people more towards the opposition than a policy that directly hurts the people’s pocket. ELV is one such policy.

Ibadah Qurban: Ibadah yang tidak diambil berat orang Islam di Malaysia

Assalamualaikum kpd semua,
Hari Raya Aidil Adha semakin hampir. Salah satu dari ibadah besar yang dilakukan pada hari raya nanti ialah ibadah Qurban. Malangnya bila kita perhatikan, ibadah ini semakin tidak diambil berat oleh umat Islam di Malaysia walau pun ialah dikategorikan sebagai `sunnat muakkad' atau pun sunat yang diberatkan. Di surau atau mesjid kita akan perhatikan ada beberapa ekor lembu sahaja akan dikurbankan padahal ada beratus atau beribu keluarga Islam di sekeliling surau atau mesjid tersebut. Kenapakah ini berlaku? Adakah kerana keluarga2 Islam itu tidak mampu melakukan ibadat kurban? Sebenarnya kos ibadat kurban sangat sedikit iaitu hanya sekitar RM360 untuk satu bahagian iatu minima untuk satu keluarga kalau hendak menyertai ibadat kurban. RM360 boleh dikumpulkan dengan hanya melakukan simpanan RM1 setiap hari sahaja untuk selama setahun. Rata2 orang Islam sanggup melanggan broadband internet sebanyak hampir RM100 sebulan yang bermakna lebih dari RM1,200 setahun. Tetapi kenapa tak sanggup belanja 25% peratus dari kos tersebut untuk tujuan ibadat sunnat yang dituntut oleh Allah? Mungkin kerana kurang mengetahui pensyariatan dan fadhilat kurban itu sendiri? Kalau itulah sebabnya maka saya append di bawah beberapa ayat Quraan dan Hadis berkenaan ibadah Qurban semoga akan memotivasikan semua untuk menyertai ibadat untuk tahun ini. Pastikan tuan/puan baca hadis yang terakhir.

Pensyariatan Qurban

1. Firman Allah S.W.T dalam surah Al-Kautsar ayat 2 :

Maksudnya : "Maka kerjkanlah sembahyang kerana Tuhanmu semata-mata dan sembelihlah korban sebagai bersyukur".
2. Allah S.W.T.telah berfirman dalam Surah Al-Haj ayat 37 :

Maksudnya: "Daging dan darah binatang korban atau hadiah tidak sekali-kali akan sampai kepada Allah, tetapi yan sampai kepadaNya ialah amal yang ikhlas berdasarkan taqwa dari kamu".
3. Sabda Rasulullah S.A.W.:

Maksudnya : "Aku diperintahkan dengan menyembelih korban itu dan ia adalah sunat ke atas kamu". (Hadis riwayat Tirmidzi)


Fadhilat yang diperolehi daripada ibadah korban ini amat besar antaranya:
1. Menambah amal kebajikan. Sabda Rasullah Sallallahu 'Alaihi Wasallam:

Maksudnya: "Korban itu bagi tuannya dengan setiap bulunya adalah kebajikan".

(Hadis riwayat Tirmidzi, Ibnu Majah dan al-Hakim)
2. Sebagai penebus dosa Sabda Rasullah Sallallahu 'Alaihi Wasallam kepada Sayyidatina Fatimah:

Maksudnya: "Hai Fatimah,berdirilah di sisi korbanmu dan saksikanlah ia, sesungguhnya titisan darahnya yang pertama itu pengampunan bagimu atas dosa-dosamu yang telah lalu".

(Hadis riwayat al-Bazzar dan Ibnu Hibban)
3. Mendapat tempat yang mulia di sisi Allah.

Sabda Rasullah Sallahahu 'Alaihi Wasallam:

Maksudnya: "Wahai manusia, sembelihlah korban dengan mengharapkan pahala daripada Allah dengan darahnya, bahawa sesungguhnya darah korban itu jika ia tumpah ke bumi maka ia akan mengambil tempat yang mulia di sisi Allah Azza Wajalla."

(Hadis riwayat Thabrani)
4. Rasullah Sallallahu 'Alaihi Wasallam pernah bersabda:

Maksudnya : "Tiada dibuat oleh anak Adam pada Hari Raya Adha akan sesuatu amal yang lebih disukai oleh Allah Ta'ala daripada menumpahkan darah (menyembelih korban). Bahawa korban itu datang pada hari kiamat dengan tunduk-tunduknya, bulu-bulunya dan kuku-kukunya. Sesungguhnya darah korban itu mengambil tempat yang mulia di sisi Allah sebelum darah itu tumpah ke bumi, maka hendaklah kamu buat korban itu dengan hati yang bersih."

(Hadith riwayat Tirmidzi)
5. Ancaman terhadap orang yang mampu melakukan qurban tetapi tidak melaksanakannya. Daripada Abu Hurairah Radhiallahu 'anhu katanya, sabda Nabi Sallallahu 'Alaihi Wasallam:

Maksudnya: "Barangsiapa yang ada kemampuan untuk berqurban tetapi tidak melakukannya, janganlah dia hadir bersama kami di tempat sembahyang kami".

Monday, October 12, 2009

Obsession with University Rankings: A Case of Missing the Forest for the Trees?

Dr. Mohd Nazari Ismail.

Prof. Gerhard Casper, when he was president of Stanford University in the US once wrote to a magazine that ranks US universities: “As the president of a university that is among the top-ranked universities, I hope I have the standing to persuade you that much about these rankings - particularly their specious formulas and spurious precision - is utterly misleading”. He added “I am extremely sceptical that the quality of a university - any more than the quality of a magazine - can be measured statistically.”

There is certainly a basis for his remark. This is because of the odd fact that in recent years very little positive correlation exists between the performance level of universities in a country and the ability of that country to avoid social and economic malaise.

This was not always the case for if we look back into history, there used to exist very strong linkage between the existence of superior academic institutions and the level of the countries’ economic and social welfare conditions. This is a truism for the Roman civilisation, the Arab-Muslim civilisation during the Umayyad and Abbasid Caliphates as well as the European civilisation during the Renaissance period. The Romans’ excellent academic institutions which were built upon knowledge sourced from Greek scholars resulted in the flowering of their civilisation. The golden age of Islam was also the time when famous educational institutions such as Al-Azhar in Egypt and other educational institutions in Islamic Spain prospered. In Europe, the Renaissance was also the time when universities such as Oxford, Cambridge, Sorbonne and others came into existence.

However, in recent years this linkage seems to have completely disappeared. The top 11 performers of the 2009 THE-QS ranking are American and British universities. However it is interesting to note that these two countries are not only the source of global financial problems, they are also the ones that are in the most critical state. America, despite having Harvard, MIT and other top ranked universities even possesses the dubious honour of being the most indebted country in the world. Its total debt is estimated at almost 50 trillion dollars and its public sector deficit for 2009 is a whopping USD1.4 trillion. On top of that it is also the world’s largest source of carbon emission per capita.

Britain, despite having Oxford and Cambridge, has an external debt which is 400% of GDP, the highest in the G7. Moreover, in a recent ranking of the stability of financial institutions by the World Economic Forum, the UK and the US were ranked at number 37 and 38, below many developing countries.

In Asia, Japan has the most number of top performers in the THES-QS table with the University of Tokyo being the highest ranked Asian university. Eleven Japanese universities are also among the top 200 in the world. But the performance of the Japanese economy is among the worst in the region. In addition, its public debt is predicted to surge to 200% of GDP in 2010. Japanese corporate bankruptcies soared by more than 10% in February of 2009 compared to the previous year and its economic problem is probably the main cause for its position at number 8 in the world in terms of suicide rate.
South Korea is another Asian country that did well in the ranking with four of its universities listed among the top 200. But Korea was among the countries that suffered the worse effects of the Asian financial crisis in the late 1990s. Its finances were so badly affected that, unlike Malaysia, it had to go cap in hand to the IMF to ask for financial help. South Korean’s economy is still in a precarious position with its foreign debt at the end of 2008 at USD380 billion or 28% of its GDP. South Korean’s position at number 11 in the world in terms of suicide rate is probably also linked to its economic problem.
It is therefore clear that nowadays having the most number of universities in the higher echelon of THE-QS ranking does not mean that the country’s social and economic welfare is also among the best in the world.
This situation is puzzling as one of the most important functions of a university is to produce academicians and graduates who can help generate ideas and formulate policies that will eventually lead to the creation of a nation with a high level of social and economic welfare. When academic institutions are unable to stop economic and social rot from taking place in society, then clearly they are not playing their true roles even if they are among the top in global rankings.
Therefore, the question that needs to be asked is why is there little linkage currently between the economic and social welfare of a country and the performance of the universities of that country. There are two plausible explanations. First, there is a possibility that the top THES-QS-ranked universities from the US, Britain and other socially and economically ill countries have not been producing real intellectuals or thinkers. They may have merely been producing `workers’ or technocrats who are meant to fill the job markets rather than intellectuals who can generate ideas in and provide advice on social values, economic systems and the practices needed to build an economically and socially stable nation. Another possible reason is that the wrong type of research and teaching activities are going on at these universities. In other words, maybe the economic and social frameworks that underlie research and teaching activities there are flawed? If this is true, then what kind of frameworks do we need in Malaysian universities to ensure that our country do not suffer the same fate? These clearly are the types of very complex issues that need further analysis and discussions. Mere concern with the superficial issue of our universities’ position on the THE-QS ranking may be a classic case of missing the forest for the trees.

Thursday, October 1, 2009

No need for excitement over temporary recoveries

Those familiar with Jalan Universiti near Universiti Malaya (UM) will remember that some time ago, rush hour traffic jams in front of the Sultan Abdul Samad Secondary School were horrendous. The main reason was that at the intersection of Jalan Universiti, Jalan Kemajuan and Jalan Dato' Abu Bakar, there was a roundabout. Any traffic expert can tell you that a roundabout is suitable only for those places where the traffic volume is not too high. But if the volume is high, a roundabout will only worsen the traffic flow. Only a systematic method of alternating the rights to transverse the roads could prevent a gridlock. The traffic problem was therefore unavoidable as long as the roundabout was there and this had little to do with whether road-users were ethical or civic-minded or otherwise in their attitude. Mercifully, the local authority had the common sense to replace the roundabout with a traffic light junction and a fly-over. Now traffic jams aroundthe location has lessened drastically even during peak hours.

This is similarly the case with the economy. When the financial system is flawed due to its predication on the lending-for-profit industry, there is no avoidance of periods of crises. The nature of the system creates conditions very similar to those of traffic jams. Certainly there will be periods of economic growth, just as there were periods of smooth traffic flow on Jalan Universiti. But that would be around 6.00am when the day has just started. But as more road users enter the road on their way to work, the flow would start to slow down. At 7.00am the first sign of a gridlock would appear. In the context of the US and the global economy those early signs of economic gridlock were around late 2007. At 7.30am the gridlock would be obvious to all. Transposing that to the US economy, this was in 2008 when the sub-prime problem was in full swing. Between 7.30am and 9.00am, the traffic situation around Sekolah Sultan Abdul Samad at Jalan University would be almost at a standstill.

And that is the state of the US economy from 2008 up to now when the credit situation caused the financial system to seize up. Operations at thousands, if not millions, of firms were brought to a stand-still. A large percentage of these firms will also be experiencing insolvency problems, as is the case with General Motors, Lehman Brothers, Freddie Mac and Fannie May in the US. Stimulus packages may get the economy moving again but only temporarily. Eventually the system will seize up again and the problem will get worse and worse, due to the worsening credit problem and increased level of indebtedness as the stimulus packages are also carried out using borrowed funds with interest charges attached. Stimulus packages, as economists are only too aware, merely serve to postpone the problem to a later time. Any growth in the economy due to stimulus packages will not be permanent. They will replaced by another period of slow-growth and recession.

In other words, the recovery situations are not unlike the temporary periods of smooth traffic flow at Jalan Universiti. It provides no reason for us to celebrate just as the daily commuting motorists at Jalan Universiti saw no real reason for joy when traffic jams eased up around 11 am. This was because they realised that as long as the roundabout was not removed, traffic congestion and gridlock could occur at any time. In fact they were also very sure that the problem would repeat itself every day between 5 pm and 8 pm and between 7.00 am to 10 am.

Back to the economy, we are now seeing some signs of apparent recovery. Strangely enough, we are now hearing excited comments by some economists who, for reasons best known to them, seem to completely ignore the temporary nature of these recovery periods. They seem to be behaving more like politicians rather than professional economists. Of course we can understand why politicians have to put a positive spin on any news as their political fortunes are dependent on whether the electorate feels good about the economy or not. But why are some economists behaving the same way? The only plausible explanation is that the fortunes of these economists are also probably contingent on those of the politicians.

In any case, we should remind both the politicians and those economists that despite the positive signs in the Malaysian economy, the Japanese economy, which is the second largest in the world, is still mired in a deep slump. In August Japan's exports shrunk by 36%, especially in the auto and steel industries. Much of Japanese exports go to the most important economy in the world - the US. But Japan's export to the U.S. fell by 34.4% this year with the largest decline being in the metal sector which fell by 82.2% in August. The weak Japanese domestic economy is reflected by the fact that its imports fell by 41.3% compared to that of August of 2008. All these reports indicate to us that as far as the world economy is concerned, the traffic jam has not eased up. Furthermore, if we bear in mind that the `roundabout' has not been replaced, it is far wiser for us to be thinking more on how to eventually remove it rather than to waste our time standing by the sides of Jalan Universiti and cheering the temporary easing of the traffic jams. Otherwise the students at Sekolah Sultan Abdul Samad will look at us and think that we are all a bunch of idiots.

A Case of a `Double Whammy’

Back in 1997, world leaders drew up a protocol in Kyoto, Japan to implement the United Nations Framework Convention for Climate Change. After several years of debate, it officially became an international treaty on 16th February 2005. The protocol represents one of the most serious collective attempts by the world’s political leaders to tackle the various grave environmental problems facing humanity.

As of February 2009, 183 states have signed and ratified the Kyoto Protocol. Sadly, the US which is the producer of the world’s largest amount of greenhouse gas per capita till now refuses to ratify the treaty. One of the main reasons for this refusal is her concern that abiding with the agreed limits will harm its economy.

The US government obviously realised that it was impossible to achieve environmental targets, as stipulated by the Protocol, and economic growth targets at the same time. This fear is not unfounded as total US greenhouse gas emissions in 2004 actually went up by 15.8% compared to 1990 levels. But to castigate the US over this single statistic may be unfair as global greenhouse emissions had also increased by 38% in the period 1992 to 2007.

In any case, the issue of climate change has not been consigned to the back-burner. The world’s political leaders agreed in 2007 to come up with a successor to the Kyoto Protocol. At the 33rd G8 summit, G8 nations agreed to reduce carbon dioxide emissions by half come 2050. In December 2009, global leaders are going to meet again in Copenhagen to discuss a framework to solve the problem of climate change.

Is there a basis then to anticipate significant improvements in the control of greenhouse gas emissions in future years? Sadly, the prognosis is not that good and the reason is very simple. The more important and immediate task in the minds of almost all political leaders around the world nowadays is on achieving economic growth rather than on reducing emissions of greenhouse gases. Political leaders are experienced enough to know that generally the electorate is nowadays concerned more about the economy than the depletion of the ozone layer. Due to their impact on jobs and income, political leaders’ management of economic issues rather than environmental issues will significantly determine their political fate. If we study the history of many countries including Malaysia, it is quite remarkable that compared to previous leaders, current political leaders’ are very much more concerned with the economy. For example, in the case of Malaysia, Datuk Seri Najib six months into his prime ministership has made more statements on the economy than Tunku Abdul Rahman during his thirteen years in the same office. Moreover, the statements nowadays are almost always, in one form or another, the reassurance to Malaysian voters that the country’s economy will continue to grow.

This need to reassure is because, unlike before, there is a very high level of `financial leverage’ or indebtedness among many private and public sector organizations, indebtedness which carries interest charge, often of the compounding type. To illustrate, the total US debt which includes households, business and financial sector debts is now estimated to be around USD57 trillion compared to only about USD5 trillion in 1957. Highly leveraged firms carry higher risk of becoming bankrupt if sales slow down. So the pressure to generate sales revenue and profit is very high or intense in order to ensure the ability to meet debt commitments. Any lateness in repayment will simply be penalised by additional interest charges. And once major players in any industry engage in financial leveraging, it is difficult for their competitors not to follow suit. Soon almost all firms in all industries cannot avoid becoming leveraged or highly indebted. For them revenue growth is essential. The alternative is bankruptcy or insolvency. Hence, the growth imperative for all economies regardless of the implications for the environment. In the case of the US, when the economy grounded to an almost complete halt in 2008, the US federal government, despite its own enormous public debt of more than US$11 trillion, quickly stepped in to ensure credit will continue to flow to business organizations and for the economy to continue to grow. The cost to the environment due to these measures is hardly discussed.

Humanity is currently facing two extremely serious problems. The first is the global climate problem which is getting worse. The second is the very serious problem of underpaid employees everywhere having to work harder to generate more revenue for their firms. In a way present day employees are now being enslaved. In the past, slaves are physically chained. Modern day slaves are chained by their nation’s indebtedness, their firms’ indebtedness as well as their own personal indebtedness from housing, car or credit card loans and the like. So for most people nowadays, there is no choice but to work if they are to avoid losing their personal possessions and avoid bankruptcy. Pay and working conditions considerations are now not as important as getting secure employment itself.

There are social costs to be borne in all these. For many families, both parents will work day and night. Many have hardly any time for their children’s upbringing. For those who can afford it, maids will do the task for them. It is not a wonder that we are witnessing increases in cases of juvenile delinquencies and family breakdowns. Tackling these problems should be the priority for our political leaders if the fate of our future generations is of the utmost concern. Global warming undoubtedly is a serious problem for it is said to be responsible for many ecological disasters including storms and floods. But it is arguable that the more serious problem is the debt-generated phenomena of modern-day human slavery and oppression and all its attendant negative social consequences. Humanity is now drowning in floods of water and floods of debt. It is a classic but tragic case of a `Double Whammy’. Sadly, these are also all man-made problems caused by making debt an industry integral to the modern economy.

Monday, August 31, 2009

Ramadhan and Taqwa

The translation of one of the Quranic verses regarding fasting in the month of Ramadhan is as follows: "O ye who believe! Fasting is prescribed to you as it was prescribed to those before you, that ye may (learn) self-restraint." (Al-Baqara, 183).
It is obvious from the verse that one of the objectives of fasting is `Taqwa' or `self-restraint' or `God-consciousness'. As such we Muslims should ask ourselves often whether our current abstinence from food and drinks during this month of Ramadhan has really increased our `God-consciousness'. Have we been able to improve our life in terms of increased commitment to the religion? What about our ability to refrain ourselves from committing sins such backbiting, engaging in conversations that are not allowed in Islam, listening to haram conversations, looking at things or images that are not allowed etc. The best person to answer those questions is our own self. We are the ones who truly knows whether we are improving, stagnant or regressing. Therefore we are also the ones who can really assess whether our Ramadhan has benefited ourselves or not i.e. whether it has fulfilled the prupose as stipulated by Allah s.w.t. in the verse mentioned at the beginning of this article. If we feel that it has not, then nobody can do anything about it other than ourselves. Improvements in iman and amal do not come by themselves but require efforts from us. We have to spend some efforts to improve ourselves. By simply having some intentions to improve without really doing something to improve ourselves will not lead us anywhere. So let us start to do something. Have a personal targets of improvement in this Ramadhan. It could be increasing our daily recitations of Quranic verses or it could be increases in the number of `Nawafil/Sunat' prayers or in the case of men, the number of times we perform our daily fard prayers in Jemaah at the masjid or surau. May Allah help us all to improve ourselves and make us among those whom He classifies as `Muttaqoon' (those who are God-conscious).

Why Ah Long Problem Is Set to Stay

A few months ago the news media were full of reports on the issue of `Ah Long' or loan sharks. Every other day there will be stories of borrowers or their family members being victimized by the loan sharks with some of the wretched victims even ending up being chained like animals, horrifying the public. Predictably, politicians got onto the bandwagon. One minister announced that he was declaring total war against the loan sharks and will not stop hunting them down even if they try to hide in `lubang cacing' (worm-holes… whatever that means).
The funny thing is that now it seems the brouhaha over the Ah Long issue has disappeared almost completely as suddenly as it emerged. However, many will admit that by no means is that an indication that the loan sharks problem has been solved. The more likely explanation is that the news media feel that the public has become tired of the issue and therefore it is not newsworthy anymore.
Moreover we should also remind ourselves that the issue is in the first place not new at all. The practice of Ah Long victimizing clients who failed to pay up have been going on for decades. And it will continue for many more decades. And politicians will no doubt continue to make meaningless declarations of war against loan sharks as soon as the problem becomes a hot topic again, so as to appear to be dynamic and concerned about the plight of the rakyat.
Truth be known, the problem of loan sharking is actually more difficult to solve compared even to the H1N1 issue. However, the explanation for its continuous occurrence is in some ways quite simple. Basically it is an outcome of the law of demand and supply. The fact is there is now plentiful availability of people who are in need of the services of money lenders. This makes money-lending a lucrative business. So much so that there will be no shortage of people who would want to go into the business.
It has not always been the case before that lending for profit is viewed as a normal and perfectly legitimate practice. In fact prior to the 15th century, there was never any legal money-lending industry anywhere in the world. Loan sharks were therefore non-existent during that time. This was because all major religions and civilizations condemn the practice of charging interest on loans no matter how low the interest was. The practice was basically looked upon by all societies and civilizations – whether in medieval Europe or ancient India or ancient China or the Islamic Middle East - as completely abhorrent, bad and evil.
However, when in the 15th century John Calvin and John Eck, both European Christian priests, successfully argued and convinced Europeans that usury only referred to `excessive interest', Europe began to legalize the practice of lending money for profit. Since the Europeans later grew to be colonial powers, the practice was introduced and became acceptable around the world too. Over time, it also became a big and influential industry. It is now very rare to find individuals or corporations or even countries which are debt-free.
But not all borrowers are fortunate enough to profit from the utilization of their borrowings. Some ended up poorer or became bankrupts. Such people, due to their degraded creditworthiness, will find it extremely difficult to borrow from established or large lending institutions. The total number of these types of people is far from small. During economic or financial crises or after the occurrence of natural disasters, the number of such people may double or even triple. These people basically are broke, cash and asset-wise, and if they are to continue to live or do business, the only expeditious recourse for them is to borrow from people who are willing to take higher risks of default. These are the so-called Ah Longs. These Ah Longs see the presence of these large numbers of high-risk borrowers who are shunned by established lending institutions as `market opportunities'. However they have to be very careful when lending to these people because if too many default on their loans, the Ah Longs themselves may end up financially ruined as, unlike banks, they have no legal recourse. Therefore they must make sure that such borrowers, who have nothing to offer as collateral for their loans, know the price of default. The borrowers must be taught that not paying up is not an option at all. Hence, the very nasty treatment meted out to defaulting borrowers.
It may be difficult to imagine but the truth is in the past lending was seen as a benevolent act i.e. to help people in need or facing hardship. Since profiting from lending was not allowed, the scale of borrowings was also small. For the lender, because his objective was to help others rather than to profit, defaulting borrowers was not a serious concern. Since his livelihood does not depend on any interest income, he is not unduly worried about defaulting loans. And in some cases, as encouraged by his religion (such as Islam) he may even forgive the debt as an act of charity towards a fellow human being who is in need.
Since the advent of the lending-for-profit business, the above scenario is no longer with us. Lending has now become a business rather than a benevolent activity. Benevolent lenders are now as rare as opportunistic lenders are common. For bankers, money lenders and Ah Longs alike, debt forgiveness is a term that is simply not part of their vocabulary.
Moreover, trying to solve the Ah Long problem without first making the activity of lending for profit illegal is like trying to avoid flooding at the river mouth when the dam has been destroyed or like trying to eradicate drug addiction in society without making the selling of drug illegal in the first place. It is mission impossible in the classic sense.

Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accountancy, Universiti Malaya. His latest book is “The Globalization Debate”, published by University of Malaya Press.

Thursday, July 23, 2009

Congrats to Pahang Religious Authority

On 21 July 2009, the Pahang Shariah High court ordered a Muslim woman be caned 6 times for consuming alcohol in public (read the full news report appended below). This a very praiseworthy action by the authorities there. I am sure other states have similar Shariah rules but this enforcement by Pahang is really laudable indeed. Hopefully this will send a message to Muslims in Malaysia as well as to non-Muslims of how bad alcohol consumption is. Actually the evil of alcohol is known by all, Muslims and non-Muslims alike. However Islam is one religion which is very explicit and unequivocal in its condemnation of alcohol consumption. Proper implementation of Shariah laws by right should be able to completely eradicate the problems associated with alcohol consumption over time. Of course implementation of Shariah laws must be preceded by comprehensive Islamic educational process so that Muslims in Malaysia are aware of what being a Muslim is all about in terms of their perspective towards life in general as well as in terms of the way we lead our daily life regardless of professions.
Moreover, we should take note that Syariah is explicit not only on alcohol but also on other evils such as gambling and usury (Riba). Therefore the Syariah authorities in Pahang and elsewhere should by right also arrest and punish people who are involved in these two evil industries. For example Tan Sri Haniff, the director of Genting, should be hauled to the court to be caned for being involved in gambling business. So should other tycoons in Riba industry. Hopefully this will serve to make them realise that actually they are committing major sins for which they will be punished severely in the fire of Hell in the after-life. Hopefully the realization will make them repent (taubat) before it is too late. It is better to be punished now in this world than to be burned by the fire of Hell in Hereafter.

(From Star online)
Rotan for having a beer
By Alina Simon
KUANTAN: A 32-year-old part-time model from Singapore charged with having a beer in a nightclub last year was ordered by the Syariah High Court yesterday to receive six strokes of the rotan.

Kartika Sari Sewi Shu-karno, who pleaded guilty to consuming alcohol in public when she made her first court appearance in December, was also fined RM5,000.

The model, who wore a blue baju kurung and black headscarf, kept her head down and was silent as judge Datuk Abdul Rahman Yunus read out the sentence. He said the accused could face a three-year jail term if she could not pay the fine while the rotan would be carried out by federal prison authorities.

He said the sentence was under Section 136 of the Pahang Islamic and Malay Traditional Practices Enactment 1982 (amendment 1987).

"The court reached the judgment after the accused pleaded guilty. We feel the sentence is fair after going through the prosecution's argument and since the rotan is provided for in the law.

"The rotan is aimed at making the accused repent and serves as a lesson to Muslims."

Kartika committed the offence at a hotel night club in Cherating and was arrested during a raid by a team from the state religious department at 1.20am on July 12, 2007.

Her lawyer Mohd Zuki Che Muhamad Ghani said he would file an application for a stay of execution pending an appeal.

This is the second time the Syariah Court here has imposed whipping on a female. The first was on a waitress and a man who were caught together with Kartika during the same operation in Cherating.

The 38-year-old from Kemaman, Terengganu, and the 22-year-old waitress from Selangor were also fined RM5,000 each and ordered to receive six strokes of the rotan.

However, the whipping has yet to be carried out in these cases which are pending appeal.

The sentence for consuming alcohol was made stiffer when the Islamic Religious Administration and Pahang Malay Tradition Enactment 1982 was amended in 1987.

Under Section 136 of the enactment, those who are found guilty can be fined up to RM5,000 or jailed a maximum of three years, or both, and sentenced to six strokes of the rotan.

Kartika Sari Sewi Shu-karno, who pleaded guilty to consuming alcohol in public when she made her first court appearance in December, was also fined RM5,000.

The model, who wore a blue baju kurung and black headscarf, kept her head down and was silent as judge Datuk Abdul Rahman Yunus read out the sentence. He said the accused could face a three-year jail term if she could not pay the fine while the rotan would be carried out by federal prison authorities.

He said the sentence was under Section 136 of the Pahang Islamic and Malay Traditional Practices Enactment 1982 (amendment 1987).

"The court reached the judgment after the accused pleaded guilty. We feel the sentence is fair after going through the prosecution's argument and since the rotan is provided for in the law.

"The rotan is aimed at making the accused repent and serves as a lesson to Muslims."

Kartika committed the offence at a hotel night club in Cherating and was arrested during a raid by a team from the state religious department at 1.20am on July 12, 2007.

Her lawyer Mohd Zuki Che Muhamad Ghani said he would file an application for a stay of execution pending an appeal.

This is the second time the Syariah Court here has imposed whipping on a female. The first was on a waitress and a man who were caught together with Kartika during the same operation in Cherating.

The 38-year-old from Kemaman, Terengganu, and the 22-year-old waitress from Selangor were also fined RM5,000 each and ordered to receive six strokes of the rotan.

However, the whipping has yet to be carried out in these cases which are pending appeal.

The sentence for consuming alcohol was made stiffer when the Islamic Religious Administration and Pahang Malay Tradition Enactment 1982 was amended in 1987.

Under Section 136 of the enactment, those who are found guilty can be fined up to RM5,000 or jailed a maximum of three years, or both, and sentenced to six strokes of the rotan.

Plight of The Uyghurs

Dear readers,
In recent weeks there have been extensive reports of violent conflicts taking place in Xinjiang. The latest was the killing of 12 Muslim Uyghurs by the Chinese security forces ostensibly for rioting. However there are strong reasons to believe that many of the accounts provided by the Chinese government are inaccurate and untrue. According to some non-governmental sources the victims of the earlier riots were actually predominantly Muslim Uyghurs (more than 800) and not the Han Chinese as reported by the government. Moreover those Muslims who were injured were discriminated against when they tried to seek medical treatments at hospitals.
The main reason for the ongoing conflict in Xinjiang is the resistance by Muslims in Xinjiang towards decades-long attempts by the Chinese government to politically, economically and culturally weaken them. It is a known fact that Muslims in Xinjiang province have been discouraged from practicing their Muslim faith for fear of being discriminated against. These continuous and systematic acts of injustice and discrimination by the Chinese government towards the Uyghurs are the main cause of the violence in Xinjiang which is now spiraling out of control.
The Malaysian government should not be indifferent towards the plight of Muslims in Xinjiang province but should call upon the Chinese government to immediately end all unjust and discriminatory policies towards the Uyghurs in Xinjiang.
On our part all of us should do as much as we can to highlight the plight of the Uygurs to relatives, friends and the general public. Hopefully over time as more people become aware of the situation in Xinjiang and express their sympathy for the Uyghurs, the Chinese government will change its policies there. The Prophet in one of his hadiths stated "Whoever does not care about the affair of Muslims is not from among them".

Wednesday, June 10, 2009

The Perils of Hyper-competition

On Monday June 1st, General Motors, the doyen of the American auto industry filed for bankruptcy. Shockwaves went through not only the US but also the world economy. Commentaries abound on the cause of the demise of such a big and powerful player in the global auto industry. Hopefully for Malaysians we can learn some important lessons, not the least on how to prevent our own national car company from meeting the same fate.

Angela Merkel, the German Chancellor, put the blame squarely on `mismanagement’, which may mean anything you want it to. Others attribute GM’s fall to its inability to come up with effective strategies against low-cost auto manufacturers from overseas, namely from Japan and Korea. Some put the blame on the unions which allegedly was the stumbling block against efforts to reduce huge labour costs which included pension liabilities and health-care costs. Some blame the American government for not supporting the company in its tough battle against foreign competition, through either greater subsidies or the imposition of higher tariff barriers. And yet others blame the American consumers for fickle-mindedness and lacking in patriotism in their buying decisions.

However, on deeper examination, one will realize that the aforesaid ‘causes’ are rather simplistic and does not address the complexity of the problem. For example, if we put the blame totally on management, we ignore the fact that the GM management has been trying for decades to increase the company’s competitiveness. It took measures such as absorbing Toyota's manufacturing methods, improving car styling and design, investing in hybrid technology, integrating the company’s operations and centralizing management to reduce costs and persuading the United Auto Workers (UAW) to agree to cost cuts. So much so that by early 2008, analysts concluded that GM had successfully transformed itself.

And the unions? Are they responsible for making GM uncompetitive by their demands for improved pay, working conditions and benefits? Who else would do this for the workers if not their unions? Moreover, many of the requests put forward were inarguably reasonable and necessary in order that members get living wages which are able to meet life’s basic needs.

Blaming the American government for not helping GM in its struggle against foreign competition betrays a lack of understanding of the nature of international business. US trade policy seeks to ensure that international trade remains free from both tariff and non-tariff barriers. Tariffs on imported cars or subsidies to GM will undermine US government’s efforts to encourage other countries to remove trade barriers. Furthermore, member countries of the WTO are agreement-bound to refrain from taking protectionist measures. Breaching the agreement can damage trading links with other nations.

Also, if the American government is considered obligated to rescue GM, the next logical question is why only GM needs to be supported and not another company or another industry which is also suffering from international competition. This is why Malaysians must be very careful when they call on their government to support Proton.

The essential truth is that GM actually is a victim of `hyper-competition’ in the car industry. Competition is good to the extent that it leads to the efficient operation of the market mechanism resulting in benefits such as the efficient use of resources and improvements in goods and services being offered to the customer. However, beyond a certain level where competition gets too intense, dysfunctional outcomes will follow. Competitors will behave ruthlessly and the losses suffered by the losing parties will no longer be optimal to society.

As an analogy, let us imagine two men wrestling in a ring according to the rules of Greco-Roman wrestling. They will do their utmost to defeat each other but at the end of the match, there is no physical injury to either wrestler other than a bruised ego. But what if the spectators decided they want a more exciting competition between the fighters and decided to throw swords and knives into the ring and force the fighters to use them? Greco-Roman wrestling will turn into mortal combat like those of the ancient Roman gladiators in the coliseums. The defeated one dies whilst the winner survives but with serious injuries.

The fatal mistake was to give competitors weapons which they in the first place did not need. The weapons of modern day corporate competitors come in the form of loans obtained from the lending industry. A few hundred years ago, business concerns competed using their own money and therefore the level of competition was relatively low. The overall outcomes of the forces of competition were positive and that was the main reason Joseph Schumpeter came up with the notion of `Creative Destruction’ in describing the benefits of competition regulated by a functioning market system. But with the legalization of usury by the Europeans, the financial industry began to grow. Thus began the throwing of `knives’ into the hands of business competitors. The lending industry is now huge and they are now throwing samurai swords, axes, and even bazookas and RPGs into the ring for business competitors to use to fight each other. So it should not surprise anyone to see GM lying on its back in the ring, mortally injured, whilst in the other corner we can see Toyota sitting on the floor looking dazed with horrific body wounds and some limbs missing. For those who are unaware, Toyota recently announced its worst ever annual loss of 436.94 billion yen for the full 2008 fiscal year and a projected a net loss of 550 billion yen for the following fiscal year.

The combat is unending as other gladiators from Korea, who during the 1997 crisis also nearly died from horrific injuries but were given mouth-to-mouth resuscitations, are now back, looking energetic, with new financial `weapons’ in hand. So don’t be surprised if in the coming rounds we see Toyota meeting the same fate as GM. The question to ask of ourselves is how much weaponry are Malaysian taxpayers willing to supply to our own gladiator Proton and when it eventually succumbs to vicious competition, what will be the extent of the injuries i.e. how much money and how many jobs will be lost? Or should we start telling humanity that the competitive situation is unsustainable, untenable and dysfunctional and that we should go back to organizing Greco-Roman wrestling rather than allowing the gladiatorial fight-to-the-death series to continue?

Monday, June 1, 2009

Lurching Towards Disaster: Between Ignorant Masses and Self-Interested leaders

On 24th May 2009, Robert Zoellick, the President of the World Bank, issued a warning that the current global economic crisis could very well lead to serious social upheavals. Mr. Zoellick is highly concerned with the increasing levels of unemployment in many countries around the world, especially in Eastern Europe where some countries are registering double digit decline in their economies.

Mr. Zoellick is actually not alone in having this worry. Many others also share the worry. However, the fact that it is being highlighted by such an important figure is very significant, especially so when political leaders in many countries are trying to re-assure their voters that the worst may already be over and that they are going to see an upward economic trend in the not too distant future.

Obviously, Mr. Zoellick, unlike politicians in many countries, is genuinely concerned with the future welfare of people. He is therefore asking governments to formulate appropriate policies in preparation for this impending grave and gloomy scenario.

Many political leaders on the other hand are more concerned with their short term political positions rather than with the long term welfare of their societies. As a result they tend to underplay the seriousness of the future economic and unemployment scenarios, fearing that it may negatively affect the perception of the public towards themselves.

To be fair, the reason why politicians behave in this manner is largely due to the expectations of the voters themselves who are more concerned with their own short-term well-being compared to the long term welfare of their societies. In their minds, the bottom line is that politicians must be able to guarantee job security so that they can continue to have money in their pockets and bread on their dinner tables. In other words, their main demand on their political leaders is that they must be able to keep the economic engine moving regardless of what is going on in the world economy.

As a result governments around the world are busy formulating economic stimulus packages despite the fact many of them are actually financially strapped and simply cannot afford them.

Take the case of Britain, one of the countries worst affected by the current financial crisis. The advanced financial system and practices of Britain made it possible for the country’s financial sector to grow relatively faster than others. But an advanced financial system is a double-edged sword. Economic growth that results from such an advanced system also brings with it a high level of indebtedness. In Britain, the debt to GDP ratio was recently estimated to be around 67%. However, due to the policy of the British government which wants to spend itself out of the crisis, the country may need to sell 220 billion pounds ($334 billion) worth of bonds. Budget deficit next year may rise to 175 billion pounds or 12.4% of GDP and the overall debt to GDP may rise to 100%. Largely as a result of this likely scenario, the rating agency Standard & Poor’s has lowered its debt outlook for Britain from “stable” to “negative”, thereby increasing the country costs of borrowing. According to many economists, Britain is in danger of becoming a bankrupt country in the manner of Iceland if its policy makers are not careful.

However, politicians in Britain have little choice if they want to remain in office come the next general election. The current crisis is causing a rapid increase in unemployment. Hundreds of thousands have lost jobs and millions of families are suffering from reduced income. For those still holding jobs, there is a high degree of uncertainty as to whether their jobs are really safe. During this difficult time, voters pin their hopes on government, thinking, falsely of course, that it can take the necessary measures to improve their job security. The politicians themselves, for fear of being voted out of office, are reluctant to admit the reality that, in this respect, they are actually quite powerless. What makes it worse is that opposition politicians are also making false promises that they can do a better job at securing voters’ future.

Under the circumstances, it is therefore unsurprising that governments around the world are unable to resist from behaving irresponsibly and indulge in policies that are extremely risky in the context of the long term future of their countries. Stimulus packages in their billions are announced to reassure the voters that the governments are doing their best to ensure that their countries’ economies are not heading for the doldrums. In reality they are just playing for time by staking the welfare of future generations. The present generation is being hoodwinked into thinking that measures that are being undertaken to solve the crisis do not have risks or costs. In the case of Britain, only the most educated are aware of the magnitude of these risks. But sadly they will never be able to change the direction of policy-making because the short-term position of political leaders is not determined by this small group of educated people but rather by the ignorant masses. Sadly, it is also an undeniable fact that this scenario holds true for many other countries.

But the saddest aspect of the current crisis is the failure by all to recognise the fact that all the measures being undertaken, even if they temporarily succeeds in slowing down economic decline, will not prevent a similar type of crisis from happening again. Moreover such a crisis will likely be on a much bigger scale, just as the current crisis is proving to be much bigger than the great depression of the 1930s. As long as the overall system remains, we all will inexorably lurch towards economic and financial destruction with all the attending consequences.

Thursday, May 14, 2009

What do Syariah Divorce Lawyers and Islamic Banking have in Common?

One of the most contentious issues discussed in relation to Islamic banking and finance is whether the whole concept is in line with Islam or not. On one side are those sceptics who argue that there is no difference between Islamic banking and conventional banking. To them Islamic banking is simply conventional banking in Islamic garb. The argument often offered by this group is the practice in Islamic banking of using interest rates in the calculations of the `selling price’. The only difference from conventional banking is that the rates are not variable whereas in the former the rates are variable. In the final analysis, according to them, transactions in Islamic banking, even though couched in terms that are halal, are essentially `lending contracts’ with interest rates still an integral part of them.

Defenders of Islamic banking on the other hand highlight the fact that halal transactions can never be considered haram and that Islamic banking contracts are halal even if the determination of the contract price involves interest rate calculations. What is important is the `aqad’ or the contractual terms of the transactions. Since the people who are involved in devising the contracts are scholars or experts in Fiqh or Islamic jurisprudence, many of whom are also very pious in their personal life, the contracts are indeed halal in nature. These Islamic banking products include `Mudarabah’, `Musharakah’, `Al Bai Bitahaman Ajil’, `Al Istisna’’ contracts.

What irks many of those opposed to Islamic banking is the fact that in numerous cases, the contractual prices of these halal Islamic banking transactions are more expensive than conventional banking contracts. Moreover, in a recent case involving a `halal' housing loan contract, the defaulter ended up with a debt obligation to the bank which was much higher than if he had purchased his house using a conventional non-halal loan. This was because the basis for the calculation of the debt obligation arising from the ‘halal’ housing loan was the final `selling price’ of the house payable over the full period of the loan whereas in a conventional case, the calculation of the debt obligation would have simply involved the unpaid monthly instalment up to the point of default plus interest.

Critics of Islamic banking are also upset with the scholars-defender of Islamic banking for what they perceive to be attempts by this latter group to defend and maintain the status quo. This view is reinforced by the fact that many of these scholars are advisers to conventional banks which have opened up `Islamic windows’ or Islamic banking divisions. These divisions are in other words merely parts of the riba-based conventional banks. The critics of Islamic banking therefore perceive the scholars to be collaborators of riba-based banks.

My own personal opinion is that much of the confusion and conflict are in reality unnecessary. For the critics of Islamic banking their error is in the excessive focus of their criticisms on Islamic banking rather than on conventional banking. Consequently, the defenders expend much effort in defending Islamic banking rather than attacking riba-based conventional banking. In other words, instead of being united on the one area on which they are both in absolute agreement which is that riba-based banking is haram, evil and therefore harmful to society and as such must be completely eliminated, they are focusing their efforts on attacking each other.

To make my point clearer vis-a-vis the role of Islamic banking, allow me to use the analogy of Syariah divorce lawyers. If we study the history of Islam we will find that, just like Islamic banking, syariah divorce lawyers is a new phenomenon. During the time of the Prophet and his companions, divorce issues were settled by the parties involved and later on with the intermediation of the Qadhi (or judge). It was much later when the Syariah family legal system and institutions became more developed that the need arose for people who were highly versed with the intricacies of the Islamic family law system. Nowadays judges in Syariah courts would prefer to preside over divorce cases where the parties are represented by divorce lawyers to ensure smooth proceedings. But of course for the parties involved the costs are higher because of the syariah divorce lawyers’ fees. Clients, especially those who felt that the outcomes of the cases were not in their favour, may feel quite upset with divorce lawyers who are sometimes be perceived to be `vultures’, benefitting from other people’s troubles. The higher the incidence of divorce, the fatter will be these `vultures’. The smaller the number of divorce cases, the skinnier will be these vultures. But does this mean that divorce lawyers are `unIslamic’ or that their profession is not in the Islamic spirit? Most certainly not. They are there because they serve to fulfil a need which is to alleviate the problems faced by divorcing Muslim couples. For couples that are happily married, the need for divorce lawyers of course does not arise and therefore little time and attention is given to them. Similarly, in the case of Islamic banks. They are there to serve those Muslims who are in need of financial assistance, either for personal or business objectives. They therefore alleviate the problems of these groups of Muslims. But for Muslims who prefer to avoid being in debt , Islamic banks are irrelevant to them.

Having said that, there is one issue that must be recognised. Just as syariah divorce lawyers is not a solution to the problem of increasing number of divorces in our society, Islamic banking is similarly not a solution to the problems associated with the phenomenon of increased indebtedness in our society. Islamic banking , as stated ealier serves simply to alleviate the problems faced by those Muslims who are in dire need of financing assistance. The long term solution for the Muslim ummah remains the same which is to eliminate riba-based banking in its entirety. In actuality, efforts to eliminate riba-based banking system are not merely a long term solution but also an Islamic obligation of all Muslims, that is, it is a fardhu a’in. This is what all Muslims should be focused on. Wallahu'alam

Wednesday, April 29, 2009

Is Obama being reckless?

This article appeared in the Star newspaper on Tuesday February 10, 2009

Is Obama being reckless?


The president’s proposed stimulus package may worsen US’ indebtedness

LESS than a week after the departure of arguably the worst president of the US, the new president appointed Tim Geithner as his new Treasury Secretary.
During the swearing-in ceremony, Barack Obama expressed his optimism that his appointee will be able to solve the current economic crisis.
His optimism is based on the fact that not only is Geithner very experienced, being a past president of the Federal Reserve Bank of New York, he is also being assisted by very experienced economists including former Treasury Secretary Larry Summers.
Many Americans and probably many more people around the world are hoping that Obama’s optimism will prove to be justified.
They are sadly oblivious to the fact that if Geithner is able to solve the current crisis, it will simply mean that Geithner has only succeeded in postponing the full brunt of the crisis to a future period.
It will also mean that Geithner has prepared for them or for their children pain and suffering on a much bigger scale in that future period.
Obama’s expectation of Geithner is actually very monumental.
Geithner is not only expected to solve the current economic problem but he is also expected to come up with a mechanism to prevent the problem from recurring.
Obama’s discussions with his economic advisory team must have been cursory so far.
Otherwise he would have been informed that no economist has ever dared to promise that his or her suggested policies will prevent future economic crises from happening again, not even Nobel laureates in economics.
Actually the step needed to solve an economic crisis is not rocket science at all.
Every one who has studied basic macro economics knows the concept of “economic cycle”.
As the name implies, the economy will always go through periods of ups and downs.
In other words, regardless of how bad the economy is, it will eventually bottom out and slowly go through a recovery period.
After all, at the core of all economic crises, the problem is over-indebtedness or over-borrowing.
All Geithner needs to do is to wait for the over-indebted firms or individuals to disappear from the system and then allow new players to come into the economy and soon it will slowly move.
However, the problem facing Obama is that the American public is impatient and expects him to solve the problem before he seeks re-election in 2012.
One very important aspect of the US economy is its size. It is HUGE.
As a result it behaves not very differently from a huge ocean-liner. To make it change direction requires lots of effort and resources, especially if the change needs to be done quickly.
For Obama, he has no choice but show the American public, in less than four years, that the economy is picking up.
Otherwise, his name will appear alongside Jimmy Carter, George Bush Sr and others on the list of one-term presidents, a prospect that he obviously will not relish.
And that is exactly the reason why from an economic perspective, I foresee Obama is going to be the most reckless president in the history of the United States.
He has pushed for Congress’ approval for his US$825bil stimulus package.
The problem is, as stated earlier, the US economy is huge and therefore nobody really knows whether that amount is enough or not.
What we do know is that since December 2007 till now, the US government has spent US$3.3 trillion of the allocated US$7.8 trillion.
Unfortunately, so far there has been no discernible positive outcome.
In fact, the situation is getting worse.
On the same day that Geithner was sworn in, CNN Money reported announcements of over 71,400 job cuts by US firms.
Clearly if Obama is serious about being re-elected in four years, he needs to spend more – much more than what has been announced.
Just as nobody really knows when the economy is going to rebound, nobody also really knows the total amount that needs to be spent to turn the US economy around.
One thing is for certain, it is going to be massive.
As is well known, the current problem of economic crisis is mainly due to over-indebtedness of companies and individuals. This indebtedness is yet to be resolved.
Therefore, the huge stimulus package being rolled out by Obama in order to secure his re-election is going to worsen the indebtedness situation.
Moreover this time it is going to involve both the public and private sectors.
By the time the US economy turns around due to the efforts of Obama’s administration, the amount of debt hanging around each taxpayers’ neck will be too scary to imagine.
The United States at the moment is being choked by a huge amount of indebtedness and that is why it is suffocating.
By the time all spending has been undertaken to get the US economy to move, American taxpayers will be completely wrapped up by debt to the point of being “mummified”.
The truth of the matter is, as long as the debt-based system does not change, there is no solution to the problem.
Henry Paulson, the previous Treasury Secretary, left his post without solving the problem even though he tried his level best.
But he should be happy because he will not be remembered as the person who recklessly worsened the US economic crisis by increasing the debt burden of the US taxpayers to unmanageable levels.
That dubious honour is likely going to be Geithner’s.
If Geithner is lucky, the honour may go to the person who appointed him.

Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accounting, Universiti Malaya. His latest book is “The Globalisation Debate: A Case of Barking up the Wrong Tree” published by University of Malaya Press.

Lending-for-profit factor

This article appeared in the Star newspaper on Tuesday January 13, 2009

The lending-for-profit factor

As long as there is such an industry, there will always be financial crises
THE present financial crisis which started in the US is now fast spreading to the rest of the world. Some people are puzzled as to why experts in academia and experienced policy makers are unable to prevent it from happening in the first place.
Their puzzlement actually stems from a failure to realise that financial crises at their core are problems of over-leveraging, over-lending and over-borrowing.
Unfortunately history has shown that regardless of efforts to prevent the occurrence of financial crises, as long as the lending-for-profit industry exists, problems of over-leveraging, over-lending and over-borrowing will always be with us.
Take the Asian currency crisis of the late 1990s. The cause of that crisis was over-investment in the Thai real estate sector which was financed by massive foreign borrowings.
The resulting current account deficits put pressure on the baht. The Thai authorities were unable to support the baht which later depreciated.

This led to a ballooning of the country’s foreign-denominated debts. The crisis spread to other South-East Asian countries with some having to resort to International Monetary Fund’s assistance.
Another example is the Argentinean financial crisis of 2001. It was caused mainly by fiscal indiscipline by successive governments using foreign debt. In 1983, Argentina’s foreign debt was US$46bil. By 1999, it was US$130bil.
This dependence on foreign borrowings, combined with severe unemployment, rampant corruption and political instability led to massive capital flight by companies and individuals.
By 2001, the government of the day was forced to take drastic measures including freezing all bank accounts, leading to violent riots.
The Japanese market crash of the late 1980s stemmed from a speculative stock and property markets bubble. These were financed by loans from Japanese banks. When the bubble burst, trillions of yen were wiped out in those markets.
Ever-cautious Japanese consumers withheld spending because of the poor economic conditions and this slowed down the economy even more. The Japanese economy has never recovered fully from this crisis till today.
It is widely agreed that the current global financial crisis is a case of a market crash followed by a banking crisis followed by economic slowdown, which is spreading worldwide from the US. The problem originated from the low interest rates in the late 1990s.
This encouraged over-borrowing, especially in the housing market. When interest rates rose from 1% to more than 5% between 2004 and 2006, the less-than-sound borrowers, i.e. the subprime sector, defaulted.
Many lending institutions which specialised in subprime mortgage went belly-up. This has a knock-on effect, which is ongoing, throughout the financial markets of the US and beyond.
In all the above cases, the fundamental common features are problems of over-lending, over-borrowing and over-leveraging.
It may surprise some people but these problems never existed before lending-for-profit became an industry.
This was because “usury”, as lending-for-profit is also called, was condemned by all major religions and philosophers such as Aristotle and Cato.
The practice of usury was looked down upon in ancient Greece and Rome and by Hindu and Buddhist teachings.
Judaism prohibited usury against fellow Jews while the medieval Christian Church forbade it completely. Islam forbids it to this day.
What changed in 16th century Europe was the emergence of Christian scholars such as John Eck and John Calvin who argued that Christianity permits the charging of interest on loans and that the term “usury” refers only to “excessive interest”.
With the advent of the Industrial Revolution, interest-charging gained further respectability with the arguments put forward by the champions of capitalism such as Jeremy Bentham and Adam Smith.
It is to be noted from that period onwards the phenomena of financial crises came into existence.
It is my contention that the active existence of the lending-for-profit industry will inevitably and unavoidably lead to excessive lending, excessive borrowing and leveraging.
As long as there is a lending-for-profit industry, there will always be financial crises of varying magnitudes.
What is particularly worrisome is that some of the solutions offered, especially the fiscal stimulus policy, in my opinion may worsen the situation in the long run.
It is true that fiscal stimulus may boost the economy in the short run. However, this will inevitably result in the government taking up ever greater debt burden.
It is strange to note that people seem to suddenly and completely forget that excessive debt is the very thing that brought forth the crisis in the first place.
Stimulus packages are simply a postponement of the greater debt burden to a future date, to be paid by future generations. It is, in a sense, an ultimate act of irresponsibility and selfishness.
What is needed in these trying times is to challenge our fundamental assumptions about how the economy, industry and commerce are and should be run.
A paradigmatic shift of our mindset is perhaps required if we were to get out of this endless cycle of booms and crises with its ever increasing toll of economic and human pain and suffering.
Could the wisdom of the ancients, repeated by the world’s great religions, about the evil of usury not be a sound ingredient for the foundation of human happiness?
·Mohd Nazari is a professor attached to the Faculty of Business and Accounting at University of Malaya. Readers’ feedback is welcome to this article. Please write to starbiz@thestar.com.my